Eregli Demir ve Celik Fabrikalari TAS

IST:EREGL.E

Earnings Call Transcript 2020-Q4

[Operator]

Ladies and gentlemen, thank you for standing by. I am Maria, your Chorus Call operator. Welcome, and thank you for joining the Erdemir conference call and live webcast to present and discuss the full year 2020 financial results. All participants will be in a listen-only mode and the conference is being recorded. [Operator Instructions]

Please note Eregli Demir ve Çelik Fabrikalari T.A.S., Erdemir, may when necessary, make written or verbal announcements about forward-looking information, expectations, estimates, targets, assessments and opinions. Erdemir has made the necessary arrangements about the amounts and results of such information through its disclosure policy and has shared such policy with the public through the Erdemir website in accordance with the Capital Markets Board regulations.

As stated in related policy, information contained in forward-looking statements, whether verbal or written, should not include unrealistic assumptions or forecasts. It should be noted that actual results could materially differ from estimates, taking into account the fact that they are not based on historical facts but are driven from expectations, beliefs, plans, targets and other factors which are beyond the control of our company. As a result, forward-looking statements should not be fully trusted or taken as granted. Forward-looking statements should be considered valid only considering the conditions prevailing at the time of the announcement.

In cases where it is understood that forward-looking statements are no longer achievable, such matter will be announced to the public and the statements will be revised. However, the decision to make a revision is a result of a subjective evaluation. Therefore, it should be noted that when a party is coming to a judgment based on estimates and forward-looking statements, our company may not have made a revision at that particular time. Our company makes no commitment to regular revisions, which would fully cover changes in every parameter. New factors may arise in the future, which may not be possible to foresee at this moment in time.

At this time, I would like to turn the conference over to Ms. Idil Onay Ergin, Investor Relations Manager. Ms. Ergin, you may now proceed.

[Idil Onay, executive]

Thank you very much, Maria. Good afternoon, everyone. Welcome to our conference call and webcast of Erdemir and its subsidiaries for 2020. Today, our CFO, Mr. Serdar Basoglu; and our Financial Control & Reporting Director, Mr. Sonmezyildiz are also joining the webcast.

First of all, I will go through our investor presentation, which you can find on our website, and you can also follow it through the webcast. Then at the end of this presentation, there is going to be a Q&A session as usual.

Before starting the presentation, I will hand over to our CFO, Mr. Serdar Basoglu. The line is yours.

[Serdar Basoglu;Chief Financial Officer, executive]

Thank you. Good afternoon, everyone. Welcome to Erdemir. Thank you for joining us today. As you all know our IR Manager, Idil, will take you through the details of 2020 performance of our company. I don't want to bore you, but before starting our presentation, I would like to highlight a couple of things both referring to 2021 outlook as well as the acquisition of Kumas.

First of all, we are proud to achieve our guidance for 2020, although it was a tough year. 2020 EBITDA margin realized at the level of 21.6%, which is far above the announced guidance as all you know. We also generated 8.5 million tons of sales and USD 472 million of net profit in 2020. Our Q4 EBITDA margin and net profit margin reached to 26.5% and 19.6%, respectively, which are the highest sales we have seen since Q3 of 2018. I can say in mine parts, with these figures, we also beat the market expectations.

While HR Turkey domestic price was around USD 500 at the end of 2019, it continuously increased to the level of USD 800 at the end of 2020. Despite the increases in prices, there was no decrease in demand. We anticipate that the positive margin expansion, which started with this increase, will maintain acceptable levels in the upcoming periods. As I mentioned, we see this strong demand especially in locally and high consumption levels.

As you know, there was an increase in steel production due to strong demand, especially in the second half of 2020. Thus, upward movement of steel prices was supported by this increasing demand trend on a global scale, particularly in the last part of 2020. I can say we believe that despite the economy, the recovery, and also monetary expansions are likely to keep steel demand and consumption strong in 2021.

Global economies are expected to grow by 5.5% in 2021, according to IMF Hub, indicates a similar trend in the steel demand. Based on the current economic outlook, we expect global steel consumption in 2021 to grow around 5% supported by recovery in demand timing. The current environment indicates that the global sector is likely to witness a stronger growth in 2021 in terms of demand. As there is high demand for both iron ore and steel prices, as all of you know, we think that both indicators will normalize eventually. The impact of the increase in iron ore prices will be visible in our financials, but we expect to remain in balance with the margin between growth, material and steel.

As you know, we realized a successful transaction at the beginning of this month, I mean the acquisition of Kumas. Kumas accounts for nearly 20% of both high-quality magnesite and strength among [indiscernible] in the world. Kumas is the industry leader in refractory products in Turkey, which are produced in integration with high quality microtiter and is a critical supplier for steel, cement and sulfur sectors with its domestic and power steel sales.

In 2020, Kumas increased its sales by 14% year-on-year and exposed to more than 50 countries, which are 40% of sales. I translate the company's annual processing capacity approximately 1.2 million tons of ore. We believe that with this acquisition, Erdemir will be able to achieve post control and efficiency by ensuring integration in its activity. Refractory is important for the sustainable production in steel sector. If there's not continued and cost-efficient supply security of the refractory, it doesn't matter how much raw material is used.

On the other hand, as I mentioned before, Kumas owns nearly 20% of the world's high protein magnesite and more than 40% of the total resource in Turkey. Kumas has a production facility that has completed its integration with these resources and mines. Kumas is a profitable company on its own and in its fully integrated production system and generates high EBITDA. But at the same time, we expect this profitability to improve with the synergy of steel and cement sectors. We think that this synergy will contribute not only to add to the financial statement, but also to allow for sustainable production approach.

Kumas reported $157 million net sales and USD 50 million EBITDA in 2019. EBITDA margin of the company was 32% in 2019. Due to increasing raw material and product prices in 2021, we plan to generate EBITDA at least as high as 2019. Within this framework of our backward integration strategy, I mean Erdemis, it is planned to create a structure that can include not only the refractory, which is one of the production puts of our company, but also the magnetite for use as a raw material in refractory production. With this structure, we are trying to create, we aim to further develop Kumas' strong export force. Yet, finally, thank you for your patience, I will be with you at the end of the presentation. So now I would like to hand over the mic to IR Manager.

[Idil Onay, executive]

Thank you, Mr. Basoglu. Our presentation consists of 2 sections, as you already know. The first one is the market overview and then the financial results. So let's start with the market overview. In Page 5, you will find puts to production figures in Eurozone, China and CIS regions. So work crude steel production was around 1.8 billion tons in 2020. It means that it's down by 1% compared to 2019. The European Union produced 139 million tons of crude steel in 2020, down by 12% compared to 2019. Chinese crude steel production, as you may see on the upper right-hand side, reached 1.1 billion tons, up by 5% when compared to 2019. China was not really affected by COVID-19 pandemic according to the preliminary data of World Steel Association. Finally, CIS region produced around 102 million tons of crude steel during this period, and it indicates around 5% increase.

I will explain the latest figures in Turkish steel market in the following slides, so let's continue with the raw material markets. In Page 6, you will see the prices of steel-related commodities. Let's take a look at coking coal, iron ore and scrap prices. Current price level of coking coal is around $160 per ton. However, it was around $105 per ton in December 2020. As you all know, China has unofficially been Australian coke coal in mid-2020. With China not lifting the ban despite it being a new year, the volatility in the market is likely to continue.

Iron ore index has almost doubled since the beginning of 2020, and it's tested around $170 per ton level during January 2021. As you all know, the main reasons for high iron ore prices are the lack of supply and China side demand. The current price level of iron ore is around $160 per ton. I also would like to remind that Erdemir is around 15% self-sufficient in terms of iron ore. We always mention that increasing scrap prices is a kind of advantage for the electric arc furnaces when we compare to integrated steel producers in Turkey. The latest scrap price level is around $400 per ton, and this price is almost $100 above last quarter.

Global commodity markets are waiting for the Chinese New Year, also known as Lunar New Year, usually celebrates for a week and sometimes longer. And this year, it falls on February 12. So after the Chinese New Year, the trend of the commodity prices and steel prices will become clear.

On Page 7, you will see the production and consumption figures of Turkish steel market. As you can see, there is an imbalance between production and consumption of long and flat steel in Turkey. Since the end of second quarter, with the reduction of the negative effects of COVID-19, both production and consumption have increased. While steel production increased 9%, steel consumption increased around 13%.

On Page 8, exports and imports data are presented. Although there are some signs of recovery in consumption, as you can see, increasing consumption has triggered imports of semifinished steel products, which are slab and billet. Imports are increased by 4% in 2020. However, exports volume has declined to 1 million tons because of the decline in global steel demand due to the COVID-19 pandemic as well as anti-dumping measures.

So let's take a look at the financial results and the operational metrics on Page 10. You will see the brief summary of our annual results. In 2020, we produced 8.7 million tons of liquid steel. During this period, long production declined around 30,000 tons, while flat production increased around 10,000 tons. We sold around 8.5 million tons in 2020, which indicates an increase of 2.3% compared to last year. Our revenue is just about $4.6 billion, which is 6% lower than 2019. Also, we generated $989 million EBITDA and $472 million net profit after tax. I will explain the details of P&L later in the following slides.

In Page 11, you will see the liquid steel production volumes, and I will skip this slide quickly and continue with the next slide, which is about the capacity utilization ratio of our group. Our capacity utilization ratio was realized at 89% in 2020. As you remember, capacity utilization ratio was 87% in the first half of this year by the reason of early timing of 4 blast furnace maintenance in the standard plant in Q2 due to the pandemic. But now it's back to usual levels. As you all know, this ratio is far better than the world's average and this is one of the key strengths of Erdemir.

On the next page, you can see our finished goods production volumes. There is [Technical Difficulty] increase in Q4 year-over-year, which comes mainly from the hot product segment. As you know, depending on demand, we can easily shift our production between flat and long steel.

On Pages 14 and 15, you will see the comparison of sales volumes and revenue. Our sales volume was around 2 million tons in Q4 2019. And this quarter, sales volume has increased around 13%. Increase in sales volume on quarterly basis is mainly from hot steel.

On Page 15, you can find breakdown of revenue for domestic and export sales. 83% of revenue comes from domestic sales, in line with the increase in domestic volume which we'll discuss in next page. Our sales revenues increased by 18% compared to the fourth quarter of 2019.

Let's take a look at the segmental breakdown of domestic sales in Page 16, and export volumes in Page 17. As you can see from the price, our domestic sales were around 509,000 tons higher than 2019, while sales to distribution chains and general manufacturing industry increased compared to last year's Phase II pipeline profile and automotive industry decline. Total export volume in Q4 was lower than Q3 exports as you can see in Page 17. This is mainly because of the high demand in Turkish domestic markets.

On Page 18 you will see the historical figures for EBITDA and net profit. We generated $347 million EBITDA in the last quarter of 2020, and our EBITDA margin of 26.5% is far better than the steel sector's average. Also, we announced $257 million net profit and a 19.6% net profit margin in the last quarter of 2020. Our Q4 EBITDA and net profit margins are the highest levels we have seen since Q3 2018.

On Page 19, you can see how we reach to net profit from EBITDA. The largest item was tax expenses, which was $293 million in 2020 due to the return to Orthodox policies in macroeconomy in the fourth quarter. Turkish lira gained more than 6% against the dollar. Therefore, we see less additional foreign exchange loss on the deferred taxation, which is $25 million in this quarter. The total foreign exchange loss on the deferred taxation is $117 million in full year of 2020. The other major item in this chart was the depreciation of $214 million. After other expenses and noncontrolling interest, we reached to $472 million net profit.

On Page 20, you can see EBITDA to change in cash bridge. Change in working capital is a result of 2 factors, actually. First one is a $50 million decrease in trade receivables. And second one is the effect of lower inventory, which is around $190 million. Also, we spent around $429 million to capital expenditures in 2020. This amount also includes advances paid for capital expenditures as well and that you will see the difference between the CapEx in Page 27 and this one. And finally, loan payments were made in 2020 which is $385 million.

On Page 21, you can see the EBITDA per ton trend, although volatile market conditions because of the COVID-19 in 2020, we have achieved $144 per ton in Q4. This is the best quarter of last 6 quarters in terms of EBITDA per ton. We are expected to see a better EBITDA result in the first quarter.

Let's take a look at the balance sheet on Slide 22. We explained a change in working capital and cash before. As you can see, there is around 30% decline in financial liabilities, and it's because of the loan payments in 2020. Other than these items, there is no significant change in our balance sheet position.

On Pages 23 and 24, you will see historical trend of financial borrowings and net cash. As we generate free cash flow, our net cash position increased to $184 million at the end of 2020.

So the next page just shows how we reached to this net cash level since December 2019. Slide 25 represents the maturity profile of borrowings. As you can see, most of our short-term loans are revolving trade financing facilities, mainly related to the export and import activities. Slide 26 represents our cost of sales breakdown. There is no significant change in our cost of breakdown. However, the composition of iron ore and coking coal and raw material costs have changed, and the percentage of iron ore cost increased in raw material baskets, while coking coal has decreased, which is in line with the trends in raw material markets.

Page 27 represents the historical CapEx spending. Total CapEx spending, excluding advanced payments, advance payments is $306 million in 2020. Our ongoing projects, such as new blast furnaces, are on progress, and there is no cancellation from the announced investment. Capital expenditures will increase in line with the new investment plans in the next 3 years.

As the last thing, there is no significant change in the number of employees. Now we may continue with the Q&A session. We will be happy to answer your questions with Mr. Serdar Basoglu and Mr. Sonmezyildiz. Thank you for listening.

[Operator]

[Operator Instructions] The first question comes from the line of Sinitsyn Boris with VTB Capital.

[Boris Sinitsyn, analyst]

A few questions from our side, please. The first one is on Kumas, forgive me my pronunciation, I guess, it is Kumas, right? I think you said that in 2019, EBITDA of Kumas was $50 million. But could you please repeat EBITDA in 2020 and your target for 2021? This is the first question.

[Idil Onay, executive]

Boris. Actually, your pronunciation was good. The EBITDA was $50 million.

[Serdar Basoglu;Chief Financial Officer, executive]

$50 million in 2019. And we are expecting as high as 2019 in 2021.

[Boris Sinitsyn, analyst]

Sorry, I think the line was not clear. Did you say the number for 2021 or just that you expect an increase versus 550 million?

[Idil Onay, executive]

Actually, we are expecting similar levels in 2021, as high as 2019 which was $50 million EBITDA.

[Boris Sinitsyn, analyst]

Okay, thank you very much. A second question is on your CapEx plans for 2021. I think during our conversation after third quarter results, the management said that it expects 600 million of CapEx for 2021. Do you reiterate this target?

[Idil Onay, executive]

Well, actually, we are expecting -- well, we have already spent 306 million CapEx in 2020, which also includes maintenance. And as long as there is no global lockdown again, CapEx will be spent between 2021 and 2023. And each year, we are planning to spend approximately $400 million. You may assume this figure will reach up around $600 million with maintenance and other investments.

[Boris Sinitsyn, analyst]

Okay. So total $600 million for 2021. Is it correct?

[Idil Onay, executive]

Well, the total package was $1.4 billion investment actually. We started this year, also each year, we're going to spend around $400 million. So the total will be $1.4 billion in total.

[Boris Sinitsyn, analyst]

Okay, thank you. Last question from my side is on your price dynamics in -- sorry, in the fourth quarter. So based on your reported numbers, you had roughly 19% increase in long prices quarter-on-quarter in the first, right? But just 10% increase in flat steel prices quarter-on-quarter. So the question is, what was the reason for lower increase of flat prices at quarter end? And do you expect some catch-up in flat steel prices realized by Erdemir in first quarter this year?

[Idil Onay, executive]

Well, yes, you are right. You will see the highest level of the sales prices, effect of these high sales prices in our first quarter results actually. As you know, there is a 2-months lag because also, we work with 2 months full order book. That's why when you see the spot price on the screen, that you just need to assume that this price will have effect on our financials 2 months later. So because of that lag, you will see the highest level of the sales prices in our first quarter results.

[Operator]

The next question comes from the line of Alagoz, Can with QNB Finansinvest.

[Can Alagöz, analyst]

Thank you for the call. Actually, my question was partially answered on Kumas. But as a follow-up, I'm asking to be sure, should we consider Kumas as a stable EBITDA generating company? Or is there any cyclical impacts on its operational performance? And any comments on its growth prospects also will be appreciated. And also, I have another question on your cash position. With your dividend payment, your CapEx plan for this year and payments for Kumas, do you think that your net cash position may turn into net debt by the end of this year based on your assumptions for this year?

[Serdar Basoglu;Chief Financial Officer, executive]

As you know, Kumas is not a public company and due to that we are -- we can't announce 2020 financial figures. And also, due to ongoing 2020 yearend audit activities. But also, I can say, yes, this is a commodity business also. Kumas is a commodity business. As all commodity businesses, it is cyclical, but we are seeing a sustainable EBITDA and EBITDA margins on upward. What I mean, because we are planning synergy works with our other companies. And also, we are planning R&D investments in Kumas. With these investments, we are planning we will have a sustainable EBITDA.

[Can Alagöz, analyst]

Okay. Great.

[Idil Onay, executive]

And also, for your cash position question, we closed the year of 2020 with $184 million net cash. And we will distribute approximately $860 million dividend as we announced yesterday. And considering this $296 million payment of Kumas in February, we will skip the net debt position, but we will return to net cash position again with the EBITDA plans to be generated in 2021.

[Operator]

[Operator Instructions] The next question comes from Jones Andrew with UBS.

[Andrew Jones, analyst]

I'd just like to get a bit of tighter guidance around 1Q, if that's possible. I mean, obviously, the massive increase we've seen in spot prices is, I guess it's difficult to translate into your numbers. But I presume you have some long-term contracts and so forth, which might mean you're not entirely spot driven. Could you give us some sort of idea on the delta that you're expecting in terms of prices going from 4Q into 1Q?

And also, the sort of evolution ballpark that you expect in terms of EBITDA per ton? And further to that, I noticed that the working capital position was pretty neutral in the fourth quarter despite rising prices. I mean, with rising prices, I would assume there's a negative working capital impact on cash flow in the first quarter. Could you give us some guidance around that possibly? Thank you.

[Idil Onay, executive]

Hi, Andy. Well, at the end of 2020, as you know, sales prices reached to the highest level. Although recently, sales prices declined slightly, considered as a normal basin. As I mentioned during the presentation, Chinese New Year will be decisive for both raw material prices and sales prices, and we believe that after the Chinese New Year trend of the commodity prices, then steel prices will become clear. But we believe both indicators will normalize eventually. And as long as the premiums between the raw materials and steel prices is in our favor, we believe we can keep our margin. So you mentioned EBITDA per ton.

Actually, we haven't shared any guidance for 2021. We are following the developments regarding the market conditions, and most probably guidance will be announced in the next period, in the next period, let's say, as we did in the past. But obviously, EBITDA per ton level will be higher when you compare with the last quarter in the first quarter. And you also mentioned net working capital. We always share that actually it all depends on the raw material prices and steel prices, as you mentioned. And there is a maturity mismatch in our balance sheet. So we sell products and pay raw material mainly in cash.

So when the steel price and raw materials are an increasing trend, our work will always require additional cash. And our book to capital increases, on the reverse side, they're going to be released from the working capital, of course. So as we have mentioned in our presentation, there is a decrease in working capital in Q4 because of the 3 factors. Decrease in freight receivables -- sorry, 2 factors. Trade receivables decrease and the effect of inventory. So considering the price trend in the first quarter, we expect to see a slight increase in net working capital.

[Andrew Jones, analyst]

Okay. But no way to sort of give us any sort of ballpark increases in EBITDA per ton or in a range of potential working capital build? Because it's pretty unprecedented how high prices have jumped in a short space of time. So it's, I guess it's quite hard for us to estimate the impact on working capital. Can you give us at least a range? Or is that difficult to say?

[Idil Onay, executive]

Well, unfortunately, it's really hard to give some kind of range or level right now. Sorry.

[Operator]

The next question comes from the line of Gulsever, Muharrem with Kona Capital Advisors.

[Muharrem Gulsever;Kona Capital Advisors, analyst]

Thank you very much for the presentation and congratulations for the results. My question is regarding the [indiscernible] iron ore project. As far as I remember, the breakeven cost for iron ore was $100 per ton, and considering that iron ore prices are now much higher than that level, do you plan to invest on this mining project? Thank you very much.

[Idil Onay, executive]

Are you asking for [indiscernible], am I mistaken?

[Muharrem Gulsever;Kona Capital Advisors, analyst]

Yes. The mining project, indeed, not the [indiscernible] plant or the enrichment plant. The iron ore mines that you have.

[Idil Onay, executive]

Okay. So actually, one thing needs to be clarified, this mine project is a project of our retailer. It's not Erdemir’s project. But in general, of course, it will affect the whole Turkish integrated steel market because it's actually a back integration investment. And iron ore is the largest cost item in our cost of goods, of course. And we have only 15% of its needs with internal iron ore production. So this mine investment may increase the internal iron ore production of course.

[Operator]

Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to management for any closing comments. Thank you.

[Idil Onay, executive]

Well, ladies and gentlemen, thank you very much for joining our webcast. We hope to meet you again in our first quarter call. Have a nice day.

[Serdar Basoglu;Chief Financial Officer, executive]

Thank you very much.

[Operator]

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephones. Thank you for calling, and have a good afternoon.